How Fund Managers View Currencies in Emerging Markets

Investors and analysts are still preaching caution in emerging-market currencies, even though many have seen gains in recent months.

The asset class was struck by a selloff at the start of the year amid political tensions in Turkey and Ukraine, resulting in bargain prices that drew in some investors and sent currencies like the higher. But the asset class as a whole still requires vigilance against sharp swings and sudden shocks.

“We are no longer in a world in emerging markets where you just ride the market passively,” says Robert Abad, who helps oversee $53 billion in emerging-market assets for Legg Mason’s Western Asset Management.

In fact, some of the best-performing currencies since the selloff subsided around the end of January are the ones with the weakest fundamentals, analysts say. Investors like Mr. Abad recommend sticking only to what they see as the most reliable bets, like the , and . They have a longer list of currencies to avoid, with the Turkish lira and often at the top.

That’s because many emerging-market currencies continue to be plagued by political uncertainty as protests and geopolitical tensions have sprung up in places like Turkey, Ukraine and Thailand. All the while, some countries’ current-account deficits are widening—which means they import more than they export. Slowing growth in China isn’t helping, since that has translated into less demand for the commodities that many developing markets produce.

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